WT/DS406/R
Page A-1

Annex A

EXECUTIVE SUMMARIES OF THE FIRST WRITTEN SUBMISSIONS
OF THE PARTIES

Contents / Page
Annex A-1 / Executive summary of the first written submission of Indonesia / A-2
Annex A-2 / Executive summary of the first written submission of the United States / A-11

WT/DS406/R
Page A-1

ANNEX A-1

EXECUTIVE SUMMARY OF THE
FIRST WRITTEN SUBMISSION OF INDONESIA

I.INTRODUCTION

  1. The Republic of Indonesia ("Indonesia") challenges Section 101 of the Family Smoking Prevention and Tobacco Control Act of 2009 (the "Act"). In particular, Indonesia challenges the "special rule for cigarettes" in Section 101(b), which banned the production or sale of certain cigarettes it characterized as "flavored" (hereinafter the "Special Rule").
  2. According to the legislative history of the Act, the Special Rule was meant to stop cigarette manufacturers from targeting underage smokers with flavours intended to increase the appeal of smoking. One type of flavoured cigarette escaped the ban – menthol cigarettes.
  3. Cigarettes may contain a variety of ingredients and flavours that are added to the tobacco or filter. There is, in short, "no logical difference", according to Professor Michael Siegel of Boston University, "between menthol and the hundreds of other flavor additives put into cigarettes", and that includes clove.
  4. Clove cigarettes have been produced in Indonesia for over a century. It is estimated that as many as 6 million Indonesians are employed directly or indirectly in the manufacture of cigarettes and the growing of tobacco. The cigarette industry, including clove, accounts for approximately 1.66percent of Indonesia's total gross domestic product ("GDP"). Indonesia has exported clove cigarettes to the UnitedStates for well over 40 years.
  5. Notwithstanding the importance of clove cigarettes to its economy and its people, Indonesia does not object to the UnitedStates regulating the production or sale of cigarettes within its borders. Nor does Indonesia object to reasonable measures designed to keep cigarettes, including clove cigarettes, out of the hands of minors. What Indonesia objects to is a measure, in this case the Special Rule, that imposes a complete ban on clove cigarettes from Indonesia, while little or no restrictions are placed on regular cigarettes and menthol cigarettes.
  6. The challenged measure is, in short, discriminatory and a violation of Article 2.1 of the Agreement on Technical Barriers to Trade ("TBTAgreement") in Annex 1A of the Marrakesh Agreement Establishing the World Trade Organization ("WTO"). For largely the same reasons, the challenged measure also violates Article III.4 of the General Agreement on Tariffs and Trade 1994 ("GATT 1994"). Furthermore, the challenged measure is more trade restrictive than necessary to achieve the stated goal of reducing youth smoking and is, therefore, in violation of Article 2.2 of the TBTAgreement.
  7. Finally, in adopting the Special Rule, the UnitedStates failed to follow a number of additional requirements of the TBTAgreement. The Special Rule is inconsistent with Article 2.8 of the TBTAgreement because it bans cigarettes solely on the basis of descriptive characteristics. The UnitedStates also failed to live up to a number of its procedural obligations under Article 2 the TBTAgreement. Accordingly, the UnitedStates acted inconsistently with its obligations under Article 2.5, 2.9, 2.10, and 2.12 of the TBTAgreement.
  8. The ban on clove cigarettes in the Special Rule created an unnecessary barrier to exports from Indonesia, a developing country Member. The UnitedStates was obliged to take account of the special and development and trade needs of Indonesia, a developing country Member of the WTO, when preparing and implementing the Special Rule. It did not do so. As such, the UnitedStates acted inconsistently with Article 12.3 of the TBTAgreement.
  9. Because the UnitedStates has violated the GATT and the TBTAgreement, its actions are considered prima facie to constitute a case of nullification or impairment of Indonesia's rights under these agreements. As such, there is a presumption that the UnitedStates' actions have had an adverse impact on Indonesia in adopting and applying the Special Rule. The burden of proof, therefore, shifts to the UnitedStates to rebut the charge.

II.FACTUAL BACKGROUND

  1. In 2007 the total USmarket for cigarettes was approximately 360 billion cigarettes. Imports of clove cigarettes totalled 398.8 million or approximately 1/10th of onepercent of the total USmarket. According to the Tobacco Merchants Association, all natural clove cigarettes or "kreteks" sold in the UnitedStates are imported, with the vast majority coming from Indonesia.
  2. The Act granted the Food and Drug Administration ("FDA") broad authority to regulate tobacco products. Among other things, the Act provided FDA with the authority to regulate marketing and promotion of tobacco products and to set performance standards for tobacco products to protect the public health.
  3. Of concern in this matter is Section 101(b) of the Act, which contains a "special rule for cigarettes". The Special Rule states that, beginning three months after the date of enactment:

a cigarette or any of its component parts (including the tobacco, filter, or paper) shall not contain, as a constituent (including a smoke constituent) or additive, an artificial or natural flavor (other than tobacco or menthol) or an herb or spice, including strawberry, grape, orange, clove, cinnamon, pineapple, vanilla, coconut, licorice, cocoa, chocolate, cherry, or coffee, that is a characterizing flavor of the tobacco product or tobacco smoke.

  1. The prohibition on characterizing flavours other than menthol or tobacco established by the Special Rule went into effect on 22 September 2009. Since that time clove cigarettes have been prohibited in the UnitedStates causing Indonesia's annual exports of clove cigarettes to the UnitedStates to fall from approximately $15 million before the ban to zero, while menthol- and tobacco-flavoured ("regular") cigarettes continue to be produced and sold in the UnitedStates. Despite the repeated requests of Indonesia, the UnitedStates has not identified any scientific evidence, sound or otherwise, in existence on or before 22 June 2009 that could possibly justify its disparate treatment of clove cigarettes and all other cigarettes, especially menthol cigarettes.

III.LEGAL ARGUMENT

A.The Special Rule accords more favourable treatment to certain domestic cigarettes than it does cigarettes imported from Indonesia

  1. Article 2.1 of the TBTAgreement requires Members of the WTO to, "ensure that in respect of technical regulations, products imported from the territory of any Member shall be accorded treatment no less favourable than that accorded to domestic like products of national origin and to like products originating in any other country".
  2. The Special Rule, both on its face and as applied, violates Article 2.1 of the TBTAgreement because it is a technical regulation that accords "less favourable" treatment to imports of clove cigarettes than it accords to like domestic products – regular and menthol cigarettes.
  3. The Special Rule constitutes a "technical regulation" subject to the TBTAgreement. The Appellate Body has interpreted "technical regulation" as encompassing documents that "regulate the 'characteristics' of products in a binding or compulsory fashion", having the effect of "prescribing or imposing one or more 'characteristics'. ..." Product characteristics are in turn defined as "any objectively definable 'features,''qualities,''attributes,' or other 'distinguishing mark' of a product". They may be "prescribed or imposed in either a positive or a negative form [-- t]hat is, the document may provide, positively, that products must possess certain 'characteristics', or the document may require, negatively, that products must not possess certain characteristics" In sum, a technical regulation must: (1) lay down "product characteristics"; (2) make compliance with those characteristics mandatory; and (3) be applicable to an identifiable product or group of products.
  4. The Special Rule meets all of these criteria since it (1) prohibits the addition of characterizing flavours – except menthol; (2) compliance with the prohibition is mandatory; and (3) the rule applies to an identifiable group of products – certain flavoured cigarettes, especially clove cigarettes. The Special Rule, therefore, constitutes a "technical regulation" within the meaning of the TBTAgreement.
  5. Clove cigarettes are "like" domestically produced regular and menthol cigarettes in the UnitedStates. The general approach used to determine "likeness" consists of an analysis that focuses on four basic factors: (1) the physical characteristics of the products; (2) end-uses; (3) consumer perceptions and behaviour; and (4) tariff classification.
  6. Clove cigarettes and domestically produced cigarettes, including menthol cigarettes, have the same physical characteristics. Both cigarettes contain cured and blended tobacco in a paper wrapper with a filter. Both contain additional ingredients and flavourings that create the unique flavour of each brand. Flavourings such as brown sugar or vanilla are not dangerous and are added to virtually all cigarettes, even those that would be considered to have a "regular" tobacco flavour. There are literally hundreds of ingredients used by tobacco companies to enhance the appeal of cigarettes and create the unique flavour of each brand. In this regard, cigarettes are no different than many other consumer products, such as mint-flavoured toothpaste, that use flavourings to attract consumers. Clove cigarettes, like all cigarettes, contain a blend of tobacco and other ingredients (in this case, ground clove buds) to give them their unique flavour. Clove cigarettes are no different from cigarettes that contain a blend of tobacco, sugar, and vanilla, or of tobacco and menthol.
  7. Clove cigarettes and domestically produced cigarettes are both "Class A" cigarettes for UStax purposes, weighing less than three pounds per thousand. Moreover, both clove cigarettes and domestically produced cigarettes satisfy the USgovernment's definition of a "cigarette": "(1) any roll of tobacco wrapped in paper or in any substance not containing tobacco, and (2) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in paragraph (1)". Clove cigarettes and menthol cigarettes share even more specific properties in that they both contain tobacco and an added ingredient (i.e. an herb or spice) with soothing properties. Both clove oil (known chemically as "eugenol") and menthol are widely used in consumer products and are recognized as having an anesthetic effect.
  8. The panel in EC – Asbestos noted that toxicity is also relevant to physical characteristics when determining whether products are "like". In that case, one product, chrysotile asbestos fibers, was known to be carcinogenic and the type of cancer concerned had a mortality rate of close to 100percent. In the current case, there is no evidence that clove cigarettes are more toxic or pose greater health risks than domestically produced so-called "regular" cigarettes or menthol cigarettes.
  9. The end use of all cigarettes, including clove and menthol cigarettes, is the same – that is, they are used to smoke tobacco.
  10. Consumers perceive regular cigarettes, menthol cigarettes, and clove cigarettes as an "alternative means of performing particular functions in order to satisfy a particular want or demand"(i.e. an alternative means of smoking). Market data indicates that 79 percent of clove cigarette smokers do, in fact, smoke "regular" (those with a characterizing flavour of tobacco) and menthol cigarettes most frequently and use clove cigarettes as a "special occasion" cigarette. In short, all cigarettes are in a competitive relationship with one another for access to channels of distribution, shelf space, and market share.
  11. Clove cigarettes and domestically produced cigarettes have the same international tariff classification at the 6-digit level, the most detailed level used among Members of the WTO.
  12. Since the Special Rule's ban does not apply to cigarettes with a characterizing flavour of menthol or tobacco, and since clove cigarettes have been shown to be "like" those products, a ban on clove cigarettes but not menthol- or tobacco-flavoured cigarettes creates unequal conditions of competition in the USmarket and is, accordingly, "less favourable" treatment.
  13. The Special Rule is also inconsistent with GATT Article III:4. Unlike TBT Article 2.1, Article III:4 does not require consideration of whether the Special Rule is a "technical regulation. Instead, a measure considered under Article III:4 must simply be a "law, regulation [or] requirement affecting [the] internal sale, offering for sale, purchase, transportation, distribution or use" of an imported product. The Special Rule prohibits a cigarette in the UnitedStates from containing a characterizing flavour other than menthol or tobacco, which clearly affects the internal sale, offering for sale or use of imported clove cigarettes by banning them from the USmarket altogether.
  14. For the same reasons outlined above with respect to TBT Article 2.1, the Special Rule is inconsistent with GATT Article III:4. Clove cigarettes are like domestically produced cigarettes in that they share the same physical characteristics, end-uses, consumer perceptions, and tariff classification. The Special Rule accords clove cigarettes less favourable treatment than domestically produced menthol- or tobacco-flavoured cigarettes in that clove cigarettes are banned, while menthol and "regular" cigarettes continue to be sold in the USmarket.

B.The Special Rule is more trade restrictive than necessary to achieve the level of protection sought by the UnitedStates

  1. The Special Rule is inconsistent with Article 2.2 of the TBTAgreement because it is more trade restrictive than necessary to protect human health and is thus an unnecessary obstacle to international trade.
  2. Indonesia agrees that protection of human health through regulation of tobacco products is a legitimate health objective. Indonesia would also agree that reducing youth smoking is a legitimate objective. But a ban is the most trade restrictive measure that can be adopted and, therefore, must be subject to the highest level of justification.
  3. In determining whether a violation of TBT Article 2.2 exists, the Panel must consider whether the ban on some flavours, but not all, contained in the Special Rule is likely to achieve the level of protection sought by the UnitedStates and whether less-trade restrictive measures are available that could also achieve that level of protection.
  4. The Act itself is helpful in understanding the level of protection sought by the UnitedStates. One of the stated objectives of the Act is "to continue to permit the sale of tobacco products to adults in conjunction with measures to ensure they are not sold or accessible to underage purchasers". Further, the standards set forth in the Act are intended to restrict the advertising and promotional practices most likely to entice youth into tobacco use, while affording ample opportunity to market tobacco products to adults.
  5. Even more revealing is what the Act does not intend to do. The Act and its supporters claim that additional government regulation is essential to stop young people from taking up smoking. However, while the FDA is given broad authority to regulate tobacco and set standards for cigarettes, the FDA is expressly prohibited by the Act from taking a number of actions that would likely be most effective at reducing the number of youth who begin smoking and become addicted. For example, the FDA is prohibited by the Act from banning cigarettes entirely, removing nicotine from cigarettes, raising the legal smoking age to 19, or requiring that cigarette sales be limited to adult-only stores.
  6. Because the Act clearly contemplates continued use of cigarettes by adults, the level of protection sought is not the elimination of all risks associated with smoking. Further, the vast majority of cigarettes known to be smoked by youth are not banned by the Act at all. Based on results from the National Survey on Drug Use and Health, a USgovernment funded study, those youth who smoke are overwhelmingly smoking "regular" cigarettes or menthol cigarettes, which are not banned by the Act. Thus, the level of protection sought is not zero access to cigarettes likely to be smoked by youth. By prohibiting the FDA from taking certain actions most likely to reduce youth smoking and dependence, the level of protection sought by the Act is not a dramatic reduction in the number of youth who smoke. Rather, what the Act describes as its desired level of protection is sufficient regulation to deter, but not prohibit, the use of tobacco products by adolescents.
  7. A ban is the most trade-restrictive regulatory tool available and in certain circumstances may be the only option for achieving a health objective, for example where the level of protection needed is the elimination of risk. The UnitedStates could have decided that to prevent people from smoking it wanted to ban all cigarettes from its market entirely. But that was not the level of protection sought by the UnitedStates. The Special Rule does not allow for legitimate sales of clove cigarettes to adults and exempts from the ban the cigarettes most likely to be smoked by youth. Thus, the ban on clove cigarettes greatly exceeds the level of protection sought.
  8. Panels have held that the question of whether a measure is "necessary" hinges on the degree to which the measure achieved the desired policy objective. In US– Gambling the Appellate Body confirmed that an assessment of the necessity of a measure involves a weighing and balancing of "the 'relative importance' of the interests or values furthered by the challenged measure", along with other factors, which will usually include "the contribution of the measure to the realization of the ends pursued by it [and] the restrictive impact of the measure on international commerce".
  9. TBT Article 2.2 indicates that "necessity" is to be determined taking into account the risks associated with not taking the challenged measure. Thus, the Panel must consider whether banning clove cigarettes, but not menthol or regular cigarettes, contributes to a reduction in the level of smoking by adolescents. In making its decision, the Panel should evaluate the likely impact of not banning clove cigarettes. The facts clearly show that failure to ban clove cigarettes would not pose any significant risk to the stated objective of the Act or to the health of adolescents. Thus, a ban on clove cigarettes is not necessary to reduce youth smoking.
  10. Evidence shows that youth are overwhelmingly more likely to smoke cigarettes not banned by the Act than clove cigarettes. In fact, eighty-seven (87) percent of high school smokers smoke just three heavily marketed brands: "Marlboro","Camel", and "Newport". Menthol cigarettes are used by 62per cent of new middle school smokers and by 46percent of new high school smokers. By contrast, the National Survey on Drug Use and Health has found minimal levels of clove cigarette use by youth. In 2007, only 0.1percent of youth smokers used clove cigarettes and by 2008 that number had fallen to zero.
  11. Another organization, Monitoring the Future, has been conducting annual, nationwide surveys of USteens in school for the past 35 years. The study's investigators have concluded that "kretek [clove cigarette] use was a short-term fad that simply did not catch on with mainstream youth".
  12. In fact, youth appear to be totally unaware of what a kretek is. In a telephone survey conducted 23-26 September 2010 by Opinion Research Corporation, 98 percent of teens surveyed indicated they had never heard of a kretek. Of the 2 percent who claimed to have heard of a kretek, 25percent incorrectly identified it as a type of car and 24percent thought it was a drug. Not even one of the teens surveyed was able to correctly identify a kretek as a type of cigarette.
  13. Dr. Michael Siegel, a noted expert on tobacco control, now with Boston University's School of Public Health, has refuted claims by the FDA and others that flavoured cigarettes are a gateway to smoking for youth and that a ban on flavoured cigarettes is necessary to reduce youth smoking:

It is demonstrably false that flavored cigarettes are a gateway to cigarette smoking, that they contribute significantly to addiction of youths to tobacco, that the tobacco industry uses these flavored cigarettes to hook children, and that the FDA ban on candy-flavored cigarettes will have any impact whatsoever on youth smoking. (This is with the exception of menthol, the one flavouring which is actually used by the tobacco companies to hook kids, but which is exempt from the flavouring ban.)